After several years of struggle, the IRS at long last completed its “repair regulations” project, including the closely related Modified Accelerated Cost Recovery System (MACRS) rules in 2014 dealing with dispositions and MACRS general asset, multiple asset, and item accounts. The IRS also completed guidance in 2014 related to accounting method changes that must be filed to comply with accounting methods described in any of the final regulations where a taxpayer’s current accounting method now differs.
The final regulations can affect virtually every business since virtually all businesses have tangible assets. Many elections and accounting method change deadlines related to the repair and MACRS final regulations are keyed to tax years starting after December 31, 2013. This deadline creates immediate compliance challenges for businesses on a calendar year that are going into the filing season for 2014 returns.
Overall, the final repair regulations (TD 9636, Sept. 13, 2013) are similar to the temporary repair regulations (TD 9564, Dec. 23 2011). However, they differ sufficiently that each business that previously applied the temporary regulations should examine whether they continue to apply under the final regulations with respect to their particular situations. Whether or not the temporary regulations were previously applied, all businesses must now comply with rules that the final regulations make mandatory in tax years beginning on or after January 1, 2014. If the final repair regulations require an accounting method that is different from an accounting method that a taxpayer currently uses an accounting method change must usually be filed for the 2014 tax year. A similar rule applies to the MACRS final regulations that are mandatorily effective in tax years beginning on or after January 1, 2014.
The final repair regulations provide several favorable surprises, including:
Also, in response to a chorus of criticism, final MACRS regulations (TD 9689, August 14, 2014) eliminate a key feature of the temporary MACRS regulations that made the recognition of loss on the retirement of a structural component elective only if the building was placed in a general asset account (GAA). This switch means that most taxpayers who filed accounting method changes to make retroactive elections to place buildings in a GAA in reliance on the temporary regulations will want to take advantage of accounting method changes that allow the revocation of those GAA elections and the preservation of losses claimed on structural components of those buildings (as explained, below).
Elections under final repair regs:
The following repair reg elections, which are not considered a change of accounting (except where indicated), and their due dates include:
The final repair and final MACRS regulations must be followed by all taxpayers starting in tax years beginning on or after January 1, 2014. However, the final regulations may at a taxpayer’s discretion be first applied to a tax year beginning on or after January 1, 2012, and before January 1, 2014 … or the taxpayer may apply the earlier repair and MACRS regulations instead. In all instances, application of these regulations require adherence to specific compliance and election deadlines.
Applying the final repair and MACRS regulations to a tax year beginning on or after January 1, 2012 and before January 1, 2014, usually requires the timely filing of accounting method changes for the tax year and the making of timely elections allowed by the regulations. The deadlines for filing accounting method changes and making regulatory elections for the 2012 tax year have expired. The filing deadlines for the 2013 tax year have also expired except for 2013/2014 fiscal-year taxpayers with a fiscal-year beginning near the end of 2013. Consequently, most taxpayers will begin to apply the final regulations by filing accounting method changes for their 2014 tax year.
MACRS general asset accounts:
The final Modified Accelerated Cost Recovery System (MACRS) regulations reverse the most significant change made by the earlier temporary regulations to the general asset account (GAA) rules. Specifically, the expansion of the qualifying disposition election to virtually any disposition, which allowed a taxpayer to elect to recognize a loss on the disposition of an asset in a GAA including retirements of structural components, is eliminated. In addition, only a few types of partial dispositions of assets are made subject to a new mandatory gain or loss recognition rule. These include the same types of partial dispositions for which gain and loss recognition is mandatory under the rules that apply to dispositions outside of a GAA, (i.e., sales, casualty losses, etc.) (Reg. §1.168(i)-1(e)).
Some taxpayers filed accounting method changes to retroactively elect to place buildings that were in service in a tax year beginning before January 1, 2012 into a GAA. This was done to take advantage of the rule in the temporary regulations that allowed a taxpayer to elect whether or not to claim a retirement loss on the disposition of a structural component provided the building was in a GAA. The final MACRS regulations changed the rules by generally not allowing taxpayers to claim a retirement loss on structural components of a building in a GAA and instead allowing a retirement loss if a building is not in a GAA by making the partial disposition election.
Since the GAA advantage for buildings is now removed, the IRS allows a taxpayer to file an accounting method change to revoke any retroactive GAA elections (change 197 of Rev. Proc. 2014-54). The change must be filed for no later than the 2014 tax year. The revocation may also be made for retroactive elections to place section 1245 property in a GAA as well as for timely GAA elections that were made for buildings and section 1245 property placed in service in a tax year beginning in 2012 or 2013. If a taxpayer claimed a retirement loss on a structural component of a building or other asset that it placed in a GAA, in addition to revoking the election, it must also file an accounting method change to make a late partial disposition election to preserve that loss (change 196).
Form 3115, Change in Accounting Method:
As an essential part of many … but not all … compliance and elective requirements and opportunities arising from the regulations is filing Form 3115, Application for Change in Accounting Method. Rev. Proc. 2014-16, as a companion to the final repair regulations, provides the principal guidance, on when to file …and when not to file… Form 3115 for these purposes. Rev. Proc. 2014-54 similarly provides accounting method changes to comply with the final MACRS regulations, effective for changes filed on or after September 18, 2014.
Special rules for completing Form 3115:
The detailed description of the taxpayer’s present and proposed accounting methods required by line 15 of Form 3115, Application for Change in Accounting Method, should include a citation to the specific portion of the repair regulations that describes the method to which the taxpayer is changing. For example, a taxpayer adopting the safe harbor for routine maintenance under the final regulations should cite Reg. §1.263(a)-3(i) (change 184). Similarly, if a taxpayer is filing a change under the final regulations to capitalize amounts previously deducted as a repair expense that are actually betterment, restoration, or adaptions costs, Reg. §1.263(a)-3(j), (k), or (i), respectively, should be cited (change 184).
In another common situation, a taxpayer may need to change its definition of a unit of property for personal property and/or buildings either as separate change on Form 3115 (change 184 or on the same Form with a change from deducting to capitalizing improvement costs (also change 184). The Form 3115 must include a detailed description of the unit of property under the present system and under the proposed change, including a citation to the portion of final Reg. §1.263(e)-3(e) under which the unit of property is permitted.
Streamlined Form 3115. Rev. Procs. Rev. Proc. 2014-16 and Rev. Proc. 2014-54 provide “reduced filing requirements for small taxpayers.” A small taxpayer is a taxpayer with average annual gross receipts of $10 million or less during the preceding three tax years. The reduced filing requirements only exempt filers from completing certain lines of Form 3115 and do not affect the detailed computation of any required Code Sec. 481(a) adjustment.
“Many elections and accounting method change deadlines related to the repair and MACRS final regulations are keyed to tax years starting after December 31, 2013.”
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